Financial independence: too good to be true?

The more I try to talk about early retirement and financial independence to my friends, the more I find that the main mental blocker on their end is that the 4% rule seems too good to be true.

There’s been recently some criticism of the 4% rule, and there’s a growing side of the FI force that says a 3% withdrawal rate would be much more accurate nowadays than the 4% rule. But I’m not even talking about that. I’m talking about people who think any return above 1% is necessarily suspicious or overly risky.

I recently chatted with a good friend about his budget and his saving habits. Despite this friend telling me he wasn’t saving enough money, after a quick review together we confirmed he is setting aside 50% of his “after tax” income. He also already has a sizeable nest in place due to past helicopter money from his parents plus his savings from the previous years. From where I stand, this person is 5 years away from total financial independence!

I won’t hide that I’m a bit jealous: this person is where I am, without even ever having thought about optimizing his household’s expenses. In my case, my savings rate and current wealth is the result of years of careful planning, and some sacrifices. It helps that he’s had a better salary than me for most of our careers, and he and his wife are DINKs. I’m the sole bread earner in a household of 5. But hey, nonetheless, good for him.

In reality, I’ve been harassing him to think about financial independence and early retirement: how cool would it be that we get to work together on cool projects after both kissing the corporate world goodbye roughly at the same time? Many FI bloggers have stated that it’s lonely at the top, so retiring at the same time as a good friend would just be awesome.

At pretty much every level, this friend seems to understand most of the benefits of FI/RE. I think it would be reasonably easy for me to convince him to retire “to” something and away from corporate. He doesn’t seem to enjoy his job lately, and is geeky enough that he could find lots of side projects in retirement. He’s also saving a lot, and as I discussed above, on his way to financial independence. He’s among my friends the one whom I believe would have a chance at being able to ER, both mentally and financially.

His problem, however, is that he doesn’t believe that he is financially independent. The guy is not overspending, but he just doesn’t trust the 4% rule, or even the 3% rule. 1% return seems appropriate for him. Before inflation!

I’m not totally surprised. Before I started looking seriously into my finances, I assumed that anything above 0.5% (see: interest rates in Japanese banks) involved some significant risk. I did not even have a concept of how risk can evolve depending on the time horizon of one’s investments. It did not help that my first attempt at handling my investments myself ended up with me being locked in a high-fee life-term insurance doubling as an investment. Ultimately I had to cut my losses in that terrible deal. At the time, this “confirmed” my impression that anything promising 5% or more in returns had to be a scam.

So, I get where my friend is coming from. When for most of your adult life you’ve been led to believe that even single digit returns are suspicious, how can you believe that the market has been returning 7% on average (which includes inflation) since forever-ago, and that some recent years have seen double digit increases?

What I think hasn’t helped him at all is that his father works for a bank. And I believe because of that my friend tends to think everything his father says or does about investments has to be “right”. I do not know if his father is an investment banker, though.

Among the pearls of wisdom that my friend keeps repeating, is this one: “my father says small investors always get skinned, this is why you shouldn’t invest in the stock market”. Yup. Obviously his father hasn’t heard of Vanguard or Schwab and their low fee ETFs. It’s to a point that even when I disclose my numbers to this friend, his answer is “it’s good for now, but you’ll see when it just drops like a rock and you’re left with nothing”. You can’t beat that kind of fear. The irony of course is that bankers and financial advisors count on that fear: this is how they can justify giving you lousy returns in exchange for “less risk”, while they enjoy their 7% returns on your money. I’ve tried pointing that contradiction to my friend (“by staying in such low return investments you are indeed getting skinned”), but that didn’t seem to trigger a reaction.

At this point, the only thing I think I can do to convince my friend is to lead by example: hopefully when I retire early, he’ll see that it’s pretty enjoyable and that he can also achieve it himself.

Imagine if you assumed a SWR of 1%. Your stash would have to be 4 times more than with the 4% rule. How much would it push your target date? (In my case: 15 to 19 years, apparently)

  1. The Green Swan
  2. Mr. Tako
  3. Financial Velociraptor
  4. Senior Crown
  5. Physician on FIRE

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